FEDERAL INSURANCE CO., Plaintiff,
P.K. CARRIER CORP., and U.S. Khalsa Corp., Defendants.
P.K. CARRIER CORP., Third-Party Plaintiff,
CERTAIN UNDERWRITERS AT LLOYD’S LONDON and Fairmont Insurance Brokers, Ltd., Third-Party Defendants.
Feb. 13, 2007.
MEMORANDUM OPINION AND ORDER
The final claim remaining in the above-captioned case is between third-party plaintiff P.K. Carrier Corporation (“P.K.Carrier”) and third-party defendant Certain Underwriters at Lloyd’s, London (“Underwriters”). P.K. Carrier alleges in its amended third-party complaint that Underwriters refused to honor an insurance policy covering physical damage to P.K. Carrier’s vehicle. Underwriters move for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure and additionally seek sanctions under Rule 11(b).
The following facts, drawn from the parties’ Rule 56.1 Statements, are not in dispute. P.K. Carrier is a trucking company located in New York. Underwriters issued an insurance policy, number SW2065L, to P.K. Carrier covering the period from April 30, 2001 through April 30, 2002. (Opp.Decl.Ex. A.) The policy insured a 1998 Freightliner truck owned by P.K. Carrier against physical damage with a limit on liability of $45,000. (Id.) On or about May 12, 2001, P.K. Carrier received a letter from the Federal Motor Carrier Safety Administration (FMCSA) stating that their application for interstate operating authority had “been reviewed and accepted,” but explicitly stating that the “letter does not constitute authority to operate.” (Def. Rule 56.1 Statement Ex. 5.) On May 14, 2001, P.K. Carrier picked up a shipment of fragrances to be delivered from New Jersey to New Mexico. Two days later, the insured truck overturned in Arkansas, causing extensive damage. On March 27, 2003, Underwriters issued a letter denying coverage for the damage based on an exclusion in the policy that provided: “This insurance does not cover … loss of or damage to any automobile … while the automobile is used in connection with any illicit trade or transportation.” (Id. Exs. 3, 4.)
STANDARD OF REVIEW
Summary judgment is appropriate when “the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” Fed.R.Civ.P. 56(c). In a motion for summary judgment, the Court must view the facts in the light most favorable to the nonmoving party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). The moving party must demonstrate that no genuine issue of fact exists for trial. Celotex Corp. v. Catrett, 477 U.S. 317, 331 (1986). If successful, the nonmoving party “may defeat summary judgment only by producing specific facts showing that there is a genuine issue of material fact for trial.” Samuels v. Mockry, 77 F.3d 34, 36 (2d Cir.1996).
Underwriters argue that under the unambiguous terms of the policy, the accident that occurred on May 16, 2001 is excluded from coverage. The Court agrees. The letter from the FMSCA that P.K. Carrier indisputably received stated that it “does not constitute authority to operate” and set out four different requirements with which P.K. Carrier must comply before a certificate, license, or permit would issue allowing interstate operations to begin. (Def. Rule 56.1 Statement Ex. 5.) The letter concludes by cautioning P.K. Carrier that failure to comply with the four requirements within 20 days may result in the dismissal of the application. (Id.) P.K. Carrier’s interstate operation of the truck without proper authority was a violation of federal law. See 49 U.S.C. § § 14906, 14910 (2006).
The insurance policy covering physical damage contained the following exclusion: “This insurance does not cover … loss of or damage to any automobile … while the automobile is used in connection with any illicit trade or transportation.” (Def. Rule 56 .1 Statement Ex. 3.) P.K. Carrier argues that this exclusion does not apply because its cargo was not contraband and the truck was duly registered, inspected, and insured. Under New York law, exclusions are accorded a strict and narrow construction, and an insurer may exclude coverage only if the exclusion is subject to no other reasonable interpretation. See Seaboard Sur. Co. v. Gillette Co., 476 N.E.2d 272, 275 (N.Y.1984). Nonetheless, clear and specific exclusions will be given effect. Underwriters argue that the exclusion based on “illicit … transportation” is unambiguous and clearly applies. Illicit is defined as “illegal or improper;” transportation is defined as “the movement of goods or persons from one place to another by a carrier.” Black’s Law Dictionary 750, 1505 (7th ed.1999). Even under a strict and narrow interpretation, the operation of a vehicle without proper authorization constitutes illicit transportation. See Globe Discount & Finance Corp. v. New Jersey Insurance Co., 199 N.E. 923 (Mass.1936) (damage while operating unregistered vehicle on public road was not covered by policy excluding damage while automobile was “used in any illicit or prohibited trade or transportation.”). It is inconsequential that the truck was not involved in “illicit trade” as the policy also has an exclusion for “illicit … transportation.” The damage to the truck was caused while the truck was used in connection with illicit transportation. Therefore, Underwriters properly denied coverage for damage to P.K. Carrier’s vehicle. Underwriters are entitled to summary judgment dismissing the last remaining claim against it.
Underwriters further move for sanctions against P.K. Carrier pursuant to Rule 11(b), arguing that the meaning of the exclusion was clear, as recognized by the Court at a prior hearing, and that P .K. Carrier’s counsel was advised that Underwriters would seek sanctions, but still failed to withdraw its third-party claim. The Court, in its discretion, does not find Rule 11(b) sanctions to be warranted in this case. First, under Rule 11(c)(1)(A), a motion for sanctions is to be made separately from other motions, while this motion was made as part of Underwriters’ motion for summary judgment. Second, the Court’s recitation of facts during oral argument held in September 2005 did not clearly state that the operation of a vehicle without proper authorization constitutes illicit transportation as used in the exclusion; instead, it merely recited the reason given in the letter disclaiming coverage for the damage to P.K. Carrier’s vehicle. Finally, while the Court finds little merit in P.K. Carrier’s arguments, they are not clearly frivolous or unwarranted by existing law, which directs the Court to narrowly construe exclusions and heavily favors the insured. Therefore, Underwriters motion for Rule 11(b) sanctions is denied.
For the foregoing reasons, Underwriters’ motion for summary judgment  is granted and motion for Rule 11(b) sanctions is denied. P.K. Carrier’s amended third-party complaint  is dismissed in its entirety. The Clerk of the Court is directed to close the case.